Posts Tagged ‘Second Great Depression’

It has become part of the liberal common sense in the United States (buttressed by the publication of Thomas Piketty’s Capital in the Twenty-First Century) that rising inequality is a top priority, with little discussion of poverty. Conservatives, of course, are pushing back—with the argument (currently being peddled by Deirdre McCloskey, basically a more libertarian version of the argument that more conventionally conservative Martin Feldstein was making in the late-1990s) that we really should be worried about poverty, and forget about inequality.

They’re both wrong. Poverty and inequality are, in fact, connected—both in the long term and in the short term. They’re connected in the long term in the sense that the period of rising inequality, beginning in the late 1970s (measured, as above, by the income share going to the top 1 percent) is also the period during which the poverty rate stopped declining and the number of Americans living below the poverty began a dramatic increase (reaching 46.5 million in 2012).

And, in the short term, we can see that the “recovery” that has been engineered to the benefit of those at the very top (again, measured in terms of the share of income going to the top 1 percent) has been accompanied by a dramatic growth in poverty (as measured in both monthly and annual rates).

Clearly, we can’t afford to choose between poverty and inequality. Current economic policies and arrangements, as they have been implemented since the mid-1970s and kept intact in the midst of the Second Great Depression, have led to growing inequality and consigned a growing segment of the population to living in conditions of poverty. Long live the rich, and to hell with the poor! Is it really so difficult to understand the following proposition: a society that lets a tiny elite capture an obscene portion of its income and wealth is also prone to force a large portion of its citizenry to try to survive in conditions of abject poverty?

Fundamentally changing the economic policies and arrangements of such a society—for example, by changing the way the surplus is appropriated and distributed—can serve to eliminate grotesque levels of inequality and, at the same time, the enduring legacy of massive poverty.

Overall, only 30 percent of the respondents considered themselves to be better off financially than they were in 2008.

In terms of credit-card debt, only 57 percent of respondents reported that they pay off their balances in full each month. (Among the remaining 43 percent who revolve their credit card balances, 82 percent had been charged interest on their balance at some time in the prior 12 months.)

The median percentage of 2102 income reported saved was only 2 percent (the mean was much higher, 9 percent), while 45 percent of respondents reported that they were not able to save any portion of their income in 2012.

Respondents were asked how they would pay for an emergency expense that came along and cost $400. The majority responded that covering such an expense would be a challenge: 19 percent indicated that they simply could not cover the expense; 9 percent would have to sell something; or would have to rely on one or more means of borrowing to pay for at least part of the expense, including paying with a credit card that they pay off over time (17 percent), borrowing from friends or family (12 percent), or using a payday loan (4 percent).

24 percent of respondents have education debt for themselves, someone else (spouse, child, or grandchild), or a combination of the two. Among those with each type of education debt, the average amount people reported owing for their own education was $25,750, with a median value of $13,000. Overall, 37 percent of respondents said that the financial costs of education outweighed the benefits. Those who did not complete their program of study were far more likely (56.5 percent) than others (38 percent for those who completed programs, 17 percent for those still enrolled) to say that the financial benefits of their education were much smaller than the cost.

When asked if they could afford to cover the cost of a major out-of-pocket medical expense, 43 percent of all respondents said that it was not likely that they could afford to pay. Only 21 percent of respondents indicated that it was very likely they could afford to pay for a major out-of-pocket medical expense. In fact, almost a quarter of respondents experienced what they described as a major unexpected medical expense that they had to pay out of pocket in the prior 12 months. The result? One quarter of respondents went without dental care in the prior 12 months because they could not afford it, 18 percent went without a doctor visit, 15 percent went without prescription medicine, 11 percent went without a visit to a specialist, and 10 percent went without follow-up care. Overall, 34 percent of respondents reported going without at least one of these types of care because they could not afford it.

Finally, 23 percent of Americans who are near retirement age (ages 45 to 59) have zero money saved. So, what are they planning to do? Basically, rely on Social Security benefits (58 percent), continue working (25 percent), and/or expect their spouse/partner to keep working (11 percent). Not surprisingly, people’s expectations depend on their level of income:

Responses to the question about the path to retirement also vary consistently by income, indicating that expectations around retirement are closely linked to financial circumstances. While 35 percent of those earning six figures reported that they intend to work full time until a retirement date and then stop working, only 15 percent of those earning less than $25,000 intend to do so. Similarly, 28 percent of those earning less than $25,000 indicated that they expect to “keep working as long as possible,” while only 13 percent of those earning $100,000 or more said the same.

The bottom line: a very large group of Americans are financially on the edge. They’re broke and getting broker.

Right now, mainstream economists are both congratulating themselves and bemoaning their fate.

Mainstream economists (such as Justin Wolfers and Paul Krugman) are congratulating themselves for having achieved a virtual consensus on the positive effects of fiscal stimulus. But they’re also complaining about the fact that the rest of the world (such as politicians, central bankers, and others) doesn’t seem to be listening to their expert advice.

Just two quick comments on this approach to consensual economics:

First, of course there’s a consensus among mainstream economics! That’s what their theories and models are supposed to do: produce and reproduce a consensus in terms of the basic analysis of macroeconomic events (although, of course, there can still be disagreements about particular aspects, such as the exact size of the fiscal multiplier and so on). And anyone who doesn’t use those models, and therefore reaches a different set of conclusions, is declared to be outside the mainstream, and therefore not worth reading or being listened to.

Second, how is it possible to declare—in the midst of the Second Great Depression—that mainstream economics has been an unqualified success? To arrive at such a conclusion would mean to overlook, at a minimum, the role that mainstream economics played in creating the conditions for the crash of 2007-08, in failing to include even the possibility of such a crash in their models, and in confining themselves to a package of monetary and fiscal policy measures—and not to even consider the possibility of larger, structural changes—as tens of millions of people lost their jobs, were stripped of their wealth, and were pushed further and further down the economic ladder.

Those engaged in consensual economics are, it seems, too busy congratulating themselves and bemoaning their fate to want to recognize the gorilla in the room.

The Pew Research Center reports that a record number of Americans—57 million or or 18.1 percent of the population—lived in multi-generational households in 2012, double the number who lived in such households in 1980.

After three decades of steady but measured growth, the arrangement of having multiple generations together under one roof spiked during the Great Recession of 2007-2009 and has kept on growing in the post-recession period, albeit at a slower pace. . .

Historically, the nation’s oldest Americans have been the age group most likely to live in multi-generational households. But in recent years, younger adults have surpassed older adults in this regard. In 2012, 22.7% of adults ages 85 and older lived in a multi-generational household, just shy of the 23.6% of adults ages 25 to 34 in the same situation.

What’s the explanation for the growth in multigenerational households? Pew cites young adults’ decisions to marry at later ages and to stay in school longer as well as the country’s changing racial and ethnic composition (since racial and ethnic minorities generally have been more likely to live in multi-generational family arrangements).

The cause that should worry us is the deteriorating economic situation of young adults:

the declining employment and wages of less-educated young adults may be undercutting their capacity to live independently of their parents. Unemployed adults are much more likely to live in multi-generational households than adults with jobs are. A 2011 Pew Research report found that in 2009, 25% of the unemployed lived in a multi-generational household, compared with 16% of those with jobs.

As Heidi Shierholz [pdf] recently testified, the wages of young graduates have fared extremely poorly during the Second Great Depression.

The real (inflation-adjusted) wages of young high school graduates have dropped 9.8 percent since 2007 (the declines were larger for men, at 11.0 percent, than for women, at 8.1 percent). The wages of young college graduates have also dropped since 2007, by 6.9 percent (for young college graduates, the declines were much larger for women, at 10.1 percent, than for men, at 4.0 percent).

But they were doing poorly even before the most recent crisis.

they saw virtually no growth over the entire period of broad wage stagnation that began during the business cycle of 2000–2007. Since 2000, the wages of young high school graduates have declined 10.8 percent (11.4 percent for men and 10.7 percent for women), and the wages of young college graduates have decreased 7.7 percent (0.5 percent for men and 14.2 percent for women). These drops translate into substantial amounts of money. For full-time, full-year workers, the hourly wage declines since 2000 represent a roughly $2,500 decline in annual earnings for young high school graduates, and a roughly $3,000 decline for young college graduates.

As a result, young adults have been increasingly forced to have the freedom to stay or move back in with their parents, thus increasing the number of Americans who are living in multigenerational households.

Through at least 2013, there are very few signs of significant recovery from the losses in wealth experienced by American families during the Great Recession. Declines in net worth from 2007 to 2009 were large, and the declines continued through 2013. These wealth losses, however, were not distributed equally. While large absolute amounts of wealth were destroyed at the top of the wealth distribution, households at the bottom of the wealth distribution lost the largest share of their wealth. As a result, wealth inequality increased significantly from 2003 through 2013; by some metrics inequality roughly doubled.

The argument behind our course, A Tale of Two Depressions, was not that the depression of the 1930s and the one today are exactly the same but, instead, that we might learn a lot more about each depression by comparing it to the other.

David Cay Johnston offers a different perspective. In his view, the majority of Americans actually fared better in the midst of the First Great Depression than they’re doing today.

Indeed, coming out of the Great Depression eight decades ago, the vast majority fared vastly better than most people have coming out of the Great Recession, which officially ended on June 30 six years ago.

It may be jarring to hear that the vast majority of Americans, the 90 percent, enjoyed bigger income gains in the 1930s than in recent years, but that is what the data show.

The data also indicate tandem increases in both want and wealth, with the vast majority worse off in 2013 than in 2009, while those at the apex of the economy are enjoying a much larger — and growing — share of national income.

Read the rest of Johnston’s essay for his survey of the data on jobs, earnings, and inequality in comparing the two eras.

I have been arguing all along (e.g., here) that, after the crisis of 2007-08 and in the midst of the Second Great Depression, capitalism faces a legitimacy crisis.

But don’t take my word for it. Consider the words of Mark Carney [pdf], the Canadian governor of the Bank of England, who is worried that capitalism is eating its own children.

Inclusive capitalism is fundamentally about delivering a basic social contract comprised of relative equality of outcomes; equality of opportunity; and fairness across generations. Different societies will place different weights on these elements but few would omit any of them.

Societies aspire to this trinity of distributive justice, social equity and intergenerational equity for at least three reasons. First, there is growing evidence that relative equality is good for growth. At a minimum, few would disagree that a society that provides opportunity to all of its citizens is more likely to thrive than one which favours an elite, however defined. Second, research suggests that inequality is one of the most important determinants of relative happiness and that a sense of community – itself a form of inclusion – is a critical determinant of well-being. Third, they appeal to a fundamental sense of justice. Who behind a Rawlsian veil of ignorance – not knowing their future talents and circumstances – wouldn’t want to maximise the welfare of the least well off?

This gathering and similar ones in recent years have been prompted by a sense that this basic social contract is breaking down. That unease is backed up by hard data. At a global level, there has been convergence of opportunities and outcomes, but this is only because the gap between advanced and emerging economies has narrowed. Within societies, virtually without exception, inequality of outcomes both within and across generations has demonstrably increased.